The Supreme Court on Wednesday held that telecom companies are not liable to deduct tax at source (TDS) from franchisee partners or distributors who sell prepaid vouchers/ coupons/ starter kits to third-party customers [Bharti Airtel vs Assistant CIT Circle 57 and anr].A bench of Justices Sanjiv Khanna and SVN Bhatti observed that telecom companies have nothing to do with the sale price set by distributors for the sale of prepaid top-up coupons to customers.As such, the Court rejected the argument by the income tax authorities that TDS should be deducted on the difference between the sale price of such coupons and the discounted price at which the coupons are acquired by the distributors from the telcos."We hold that the assessees (telcos) would not be under a legal obligation to deduct tax at source on the income/profit component in the payments received by the distributors/franchisees from the third parties/customers, or while selling/transferring the pre-paid coupons or starter-kits to the distributors," the Court concludedThe Court rejected an argument by the Revenue authorities that telcos should "periodically ask" for information on the income made by distributors by selling prepaid coupons and then deduct tax at source.
"The argument of the Revenue that assessees should periodically ask for this information/data and thereupon deduct tax at source should be rejected as far-fetched, imposing unfair obligation and inconveniencing the assesses, beyond the statutory mandate. Further, it will be willy-nilly impossible to deduct, as well as make payment of the tax deducted, within the timelines prescribed by law," the bench opined.
The judgment came on a batch of appeals concerning whether the telcos were liable to pay TDS from their franchisee partners/ distributors who sell prepaid coupons to customers.
The income tax authorities had argued that the profits made by distributors were like a commission or a brokerage paid by the telcos to the distributors. Therefore, TDS liability under Section 19H of the Income Tax would arise, the revenue authorities had argued. This stance was opposed by the telcos.
The Delhi and Calcutta High Courts had ruled against the telcos while the High Courts of Rajasthan, Karnataka and Bombay ruled against the income tax authorities.
While examining the case, the Supreme Court observed that the legal obligation to deduct 5 per cent TDS on payment of commission or brokerage under Section 194H of the Income Tax Act only arises when a principal-agent legal relationship is established.
The Court proceeded to express reservations over whether such a relationship was there between the telcos and its distributors in the end sale of prepaid coupons. The Court noted that the telcos were largely not involved in the manner in which distributors sold prepaid coupons to end-users.
"The assessees (telcos) are not privy to the transactions between distributors/franchisees and third parties. It is, therefore, impossible for the assessees to deduct tax at source and comply with Section 194-H of the Act, on the difference between the total/sum consideration received by the distributors/ franchisees from third parties and the amount paid by the distributors/ franchisees to them," the Court explained.
The Court concluded that the profits made by the distributors would not constitute a commission or a brokerage payment by the telcos, or attract any TDS liability.
The appeals filed by the tax department were, hence, dismissed, while those by the telecom companies were allowed.
Senior Advocates Kavin Gulati and Arvind P Datar appeared for the telecom companies.
Additional Solicitor General N Venkataraman and Arijit Prasad appeared for the Revenue.
TAGS: Supreme Court telecom companies tax deduction at source (TDS) franchisee partners distributors prepaid vouchers coupons
